Sound Music Company is considering the sale of a new sound board used in recordi

Question

Sound Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $27,000 each, and the company expects to sell 1,600 units per year. The company is currently sells 2,000 units of its existing model per year. The old board retails for $22,500. The variable costs of the new board will be 55 percent of sales, fixed costs are $1,300,000 per year, and the depreciation on the equipment to produce the new board will be $1,500,000 per year. If the tax rate is 38 percent, what is the annual operating cash flow for the project?

Explanation / Answer

cash from retail sale = (27000 x 1600) = 43,200,000

fixed cost = 1,300,000

variable cost =  0.55(27000 x 1600) = 23,760,000

depreciation on the equipment = 1,500,000

total cash inflow = 43,200,000-1,300,000-23,760,000-1,500,000 = 16,640,000

tax = 38% = 0.38 x 16,640,000 = 6,323,200

annual operating cashflow = 16,640,000 - 6,323,200 = 10,316,800

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